100% Reserve Banking--Some History from George Selgin

George Selgin, writing in the new blog, Free Banking, has an interesting post on 100% reserve banking.   He argues:

...every significant 100-percent bank known to history was a government-sponsored enterprise, which depended for its existence on some combination of direct government subsidies, compulsory patronage, or laws suppressing rival (fractional reserve) institutions. Yet despite the special support they enjoyed, and their solemn commitments to refrain from lending coin deposited with them, they all eventually came a cropper.

Selgin discusses the history of 100% reserve banks in Amsterdam, Venice, and Barcelona.    That government action in the early modern period replaced the international fraction-reserve banking system developed by Italian money changers in the middle ages wasn't news.   Exactly how transparent were these efforts to get money in the hands of the government was news, at least to me.

In the comment section of that post, Selgin points to his working paper on the role of goldsmith's in the rebirth of fractional reserve banking in the 17th century.     He reviews the textbook stories of fraud (which I have repeated for years in my money and banking classes.)  

The myth is that merchants carried about bags and chests of gold until they began to store them in the royal treasury.   Wicked Charles I seized the money.   Then, people paid to store coin with goldsmiths.   Soon the goldsmiths began to secretly lend out some of the stored money that was gathering dust.    Fractional reserve banking was discovered!

One problem with that story is that it ignores the banking system developed by Italian money changers that operated all over Europe.   Selgin provides some evidence that the Italians took over the business from the Jewish money changers centuries before.    Perhaps it should be no surprise that English goldsmiths were similarly stepping into a well developed business model.

Apparently, the rule was that if a "depositor" placed coins in a tied or sealed bag, then these were to be stored.    Any loose coins "deposited" were the property of the "bank," which was under the general obligation to keep its promises to pay money in the future.

I was also interested to discover that the gold "stored" by in the royal treasury in the reign of Charles I was metal waiting to be coined.   It was borrowed, but most was repaid immediately (due to the outcry) and the rest repaid promptly.    Interesting episode regarding the government monopoly on coining full bodied commodity money, but not too relevant to the development of banking.